Celebrating 7 years of the Growth & Income smallcase 🎉

Seven years ago, we introduced the Growth & Income smallcase. Back in the day, our goal was simple – to create smallcases rooted in diverse ideas and strategies. Our focus was on finding strategies that stood the test of time, adaptable to the nuances of the Indian market without losing their essence.

Kevin Matras’ “Finding #1 Stocks: Screening, Backtesting, and Time-Proven Strategies” book had been making rounds in the investment circles at the time. Kevin Matras is the Executive Vice President of Zacks Investment Research, a Chicago-based firm. Over the years, Matras has earned the reputation of a fundamental stock screening and technical chart patterns expert. In this book, he provides market-beating techniques and practical guides that have outperformed the market in the long term.

So, this book, acclaimed for its market-beating techniques, forms the foundation for the Growth & Income smallcase

Investment Philosophy

To ensure the integrity of the Growth & Income smallcase, we steer clear of companies that might manipulate earnings through questionable accounting practices. Instead of relying on the easily manipulated price-to-earnings (PE) ratio, we utilize the price-to-operating cash flow (POCF) ratio. This approach makes it more challenging for companies to manipulate earnings, as cash flow provides a more transparent and reliable indicator of a company’s financial health.

Our emphasis on the POCF ratio not only safeguards against earnings manipulation but also aids in the selection of companies with attractive valuations. Additionally, our stringent criteria dictate that only companies exhibiting positive dividend growth make their way into the smallcase. Dividends play a crucial role in stock investing, signaling a company’s willingness to share profits with shareholders. The inclusion of companies with positive dividend growth reflects a commitment to shareholder value, making dividends a meaningful measure of a company’s growth, profitability, and dedication to rewarding investors. 

Stock Composition of the Growth & Income smallcase

This smallcase is mid & small-cap heavy due to the criteria employed in the stock selection. What truly sets this smallcase apart is its low turnover. Low turnover indicates infrequent additions or removals of stocks.

How is low turnover achieved? During quarterly rebalancing, factors such as earnings and dividend growth are considered – since these factors are released annually, the churn rate is low. The Price to Operating Cash Flow (P/OCF) ratio is the only factor that guides stock turnover. 

Stocks remain in the basket as long as they meet the criteria set for this smallcase and pass checks for liquidity, and promoter pledges among others. Removals occur only when criteria are unmet or adverse news surfaces, never solely based on price performance. In the recent rebalance, one stock was added and one was removed, attesting to the low turnover in this smallcase.

Performance of the Growth & Income smallcase

Since this smallcase is mid & small-cap heavy, there may be stagnation or loss during market downturns, but over the long run, these stocks are likely to offer good returns. Don’t just take our word for it. Let’s look at different events that have affected the market and how this smallcase fared as opposed to its benchmark. In terms of absolute returns, the value of ₹ 1L invested once seven years ago during launch would today be ₹ 4.7L, indicating compounded growth of 24.7%. The smallcase has performed significantly better than the comparable benchmark Equity Smallcap universe on a risk-adjusted basis as well. It has a Sharpe ratio of 1.2x since inception compared to just 0.6x of equity smallcap universe. 

Even when considering the max drawdown of this smallcase, it fares better than equity smallcap. While Growth & Income fared at -52.4%, the comparable benchmark stood at -65.1%. A drawdown refers to how much an investment is down from the peak before it recovers back to peak.

Navigating Market Downturns & Market Uptrends

The true mettle of any portfolio is revealed during challenging times. The Growth & Income smallcase faced its litmus test during the Covid-19 crisis and the Russia-Ukraine crisis.

During the Covid-19 crisis, while the broader equity smallcap market plummeted by 22.3%, the Growth & Income smallcase demonstrated resilience with a minor downturn of 5%. This remarkable performance showcased the smallcase’s ability to mitigate losses during unprecedented market challenges.

In the face of the Russia-Ukraine crisis, the Growth & Income smallcase once again outperformed the equity smallcap market, recording a growth of 6.4% compared to a decline of 17.9%. This reiterates the smallcase’s capacity to navigate geopolitical uncertainties with steady growth.

Beyond weathering storms, the Growth & Income smallcase captures opportunities during market upturns. In periods marked by government reforms and global economic growth, the smallcase surged by an impressive 51.2%, surpassing the equity smallcap market’s 26.5%.

During the post-Covid pickup, the smallcase showcased 86.9% while equity smallcap recorded 101.5% returns. Similarly, during the recent phase of India’s growth story Growth & Income returned 65.1% compared to the equity smallcap market’s 74%.

Conclusion

Be it year-on-year performance or during various market cycles, the Growth & Income smallcase has stood as a resilient investment.

Concluding our 7-year celebration, we extend gratitude to all users exploring this journey. Recognized among Windmill Capital’s top 10 smallcases invested in 2023, it remains a trusted choice for those seeking a slightly higher risk appetite. 🤝

Until our financial paths cross again. ✌️

^{Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy/sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and use such independent advisors as they believe necessary. Refer to our disclosures page, here. Windmill Capital Private Limited – Research Analyst – SEBI reg. no: INH200007645; Compliance Officer – Ajoy Bharadwaj, Phone Number – 8296014433; Email Id – compliance@windmill.capital; Support email id – notifications@windmill.capital}